"I am a General Contractor. I sub out all the work. All my subs have GENERAL LIABILITY. Why do I need to carry General Liability?"
I get asked this question a lot. It is really a good, thought provoking question!
Here are some answers to that question........
1. Coverage for defense costs. As the General Contractor, you are ultimately going to be brought into whatever lawsuit/issue arises on your project. Since GENERAL LIABILITY policies provide you with a legal defense if the issue looks like a potential claim to that policy, you would not need to go to the expense of retaining your own legal defense team. Not only can this save you many thousands of dollars but, in addition, your insurance company should provide a legal representative familiar with construction issues to defend you.
2. Do you really know what coverage your subs bought and if it covers the work being done? Any of your subcontractors may have obtained a very limited coverage General Liability policy, or one that may exclude many issues. That could leave your business exposed to potential liability with no coverage from the sub’s policy to fall back on. Without examining each subcontractor's policy, there is no way for you to determine how adequate his coverage is in protecting him and ultimately you. For example, I have reviewed several subcontractor's policies and found that they had a "residential construction exclusion" which is troubling since all they did was residential construction! Therefore, their GL policy would cover nothing that they were doing..... leaving you, the GC, exposed to claims arising out of their work.
3. What if your sub’s policy cancels during the year? You may have received a valid certificate of insurance for a sub indicating that he has insurance. While that may be true on the day the certificate was issued, if that policy were to be cancelled for any reason, would you be notified? If that subcontractor doesn’t have coverage at the time of loss, you can still be held legally liable for actions of the subcontractor that caused injury or damage.
TIP: The only way to be sure you will get notice in case of cancellation is to be added by endorsement as an additional insured or designated entity. This endorsement usually results in an additional premium charge for the policyholder.
4. What if a Subcontractor’s policy limits are too low to cover the loss? Your sub may be legitimately insured, but may have obtained a GENERAL LIABILITY policy that has limits that are too low to take care of the issue. You could be held responsible for the shortfall. For example (this really happened to one of our clients), a builder builds an $800,000 house. The buyer moves in (along with all his personal possessions) and later calls you to have one of your subs come back and fix something (i.e. painter/plumber/electrician etc). In the course of doing the "call back" work, the sub does something (or fails to do something) and causes the house to burn to the ground. The insurance company who provided the homeowners policy to the owner, adjusts the claim at $1,300,000 ($800,000 for the house, $400,000 for the personal possessions that burned up, and $100,000 for "additional living expenses" for the owner to live somewhere else for a year while his house is being rebuilt). Your sub has a GL policy with a $1 million limit, so you are OK right? Unfortunately, not always. The homeowners Insurer will sue you (called subrogation) to recoup their $1,300,000 paid for the claim. Since the sub only had $1 million limits, you could be responsible for the additional $300,000 as the sub did the "call back" work at your direction. So, even though you used an insured sub with a legitimate policy, you could still have a substantial liability exposure.
The 4 items above are not all the potential issues that could arise out of subcontractors and their insurance, but they do highlight the need for any GC, residential or commercial, to have their own quality General Liability coverage in place. In a future blog, I will discuss the importance of "Subcontractor Agreements" as a way for you to formalize your relationships with your subs, and to contractually require better protection from your subs.